Democrats Deny Social Security’s Red Ink

Summary

Some senior Democrats are claiming that Social Security does not contribute “one penny” to the federal deficit. That’s not true. The fact is, the federal government had to borrow $37 billion last year to finance Social Security, and will need to borrow more this year. The red ink is projected to total well over half a trillion dollars in the coming decade.

President Barack Obama was closer to the mark than some of his Democratic allies when he said that Social Security is “not the huge contributor to the deficit that [Medicare and Medicaid] are.” That’s correct: Medicare and Medicaid consume more borrowed funds than Social Security, and their costs are growing more rapidly. But Obama’s own budget director, Jacob Lew, was misleading when he wrote recently that “Social Security benefits are entirely self-financing.” That’s not true, except in a very narrow, legalistic sense, and doesn’t change the fact that Social Security is now a small but growing drain on the government’s finances.

Payroll taxes exceeded benefit payments regularly until 2010. But the fact is that Social Security has now passed a tipping point, beyond which the Congressional Budget Office projects that it will permanently pay out more in benefits than it gathers from Social Security taxes. The imbalance is made even larger this year by a one-year “payroll tax holiday” that was enacted as part of last year’s compromise on extending the Bush tax cuts. The lost Social Security tax revenues are being made up with billions from general revenues that must all be borrowed. The combined effect is to add $130 billion to the deficit in the current fiscal year.

It’s important to note that benefit payments are not in immediate danger. Under current law, scheduled benefits can be paid until about 2037, according to the most recent projections. But keeping those benefits flowing is already requiring the use of funds borrowed from the public. So we judge the claim that Social Security is not currently contributing to the deficit to be false.

Analysis

As always, we take no position on whether Social Security should be changed, either to reduce the deficit or to shore up its troubled finances for future generations. Our job here is simply to establish facts and hold politicians accountable for any misinformation.

We’ll start with the basic numbers. The nonpartisan Congressional Budget Office issued its most recent projections for Social Security’s income and outgo Jan. 26, along with its twice-yearly “Budget and Economic Outlook.” What those numbers show is that Social Security ran a $37 billion deficit last year, is projected to run a $45 billion deficit this year, and more red ink every year thereafter.

Matters are even worse than this chart shows. In December, Congress passed a Social Security tax reduction. Workers are temporarily paying 2 percentage points less, from 6.2 percent to 4.2 percent, in Social Security payroll taxes this calendar year. Since the government is making up the shortfall out of general revenues, CBO’s deficit projections for the trust funds do not include that. But CBO’s figures predict that the “payroll tax holiday” will cost the government’s general fund $85 billion in this fiscal year and $29 billion in fiscal year 2012 (which starts Oct.1, 2011.) Since every dollar of that will have to be borrowed, the combined effect of the ” tax holiday” and the annual deficits will amount to a $130 billion addition to the federal deficit in the current fiscal year, and $59 billion in fiscal 2012.

Social Security has passed a tipping point. For years it generated more revenue than it consumed, holding down the overall federal deficit and allowing Congress to spend more freely for other things. But those days are gone. Rather than lessening the federal deficit, Social Security has at last — as long predicted — become a drag on the government’s overall finances.

As recently as October, CBO was projecting that it would be 2016 before outlays regularly exceed revenues. But Social Security’s fiscal troubles are more severe than was thought, and the latest projections show the permanent deficits started several years ahead of earlier predictions.

Don’t be confused by the fact that the trust funds are projected to continue growing for several more years. That’s because Treasury must still credit interest payments to the funds on the borrowings from earlier years. But unless taxes are increased or other spending is cut severely, the government will have to borrow from the public to pay the interest that it owes to the trust funds.

And don’t be misled by those who say the system can pay full benefits until about 2037 without making any changes to the law. That’s true, but does not change the fact that Social Security taxes no longer cover those benefits. The government is now borrowing money to pay them, and will do so every year for the foreseeable future. And keep in mind, if nothing is done, when those trust funds are exhausted, benefits would have to be cut by 22 percent in 2037, and more each year after that, according to the most recent report of the system’s trustees. By 2084, the system will generate only enough revenue to pay for 75 percent of promised benefit levels.

Facts vs. Spin

Those are the facts. But they haven’t stopped some Democrats from claiming over and over that Social Security doesn’t contribute “one penny” to the deficit. Examples:

Reid: Social Security has contributed not a single penny to the deficit. So we can talk about entitlements as long as you eliminate Social Security. . . . Social Security is not part of the problem we have in America with the deficit.

President Barack Obama’s budget director, Jacob Lew, doesn’t go quite that far. But he did write a Feb. 22 opinion piece in USA Today claiming that Social Security “does not cause our deficits” and is “entirely self-financing”:

Lew: [L]ooking to the next two decades, Social Security does not cause our deficits.Social Security benefits are entirely self-financing. They are paid for with payroll taxes collected from workers and their employers throughout their careers.

USA Today’s editorial writers rebutted Lew and took him to task for making a similar claim earlier, saying, “That would be nice if it were true. It’s not.” The newspaper stated:

USA Today: Social Security is a cash-in/cash-out program. It went into the red last year, when payroll tax revenue came up about $37 billion short of the benefits paid to retirees.

And as we’ve shown, USA Today is correct.

Interestingly, the president has stopped short of this sort of misleading talk. On Feb. 15, Obama held a White House news conference to defend his budget proposal for fiscal year 2012. And here’s what he said about cutting entitlement spending:

Obama: Now, you talked about Social Security, Medicare and Medicaid. The truth is Social Security is not the huge contributor to the deficit that the other two entitlements are.

That’s true enough. As Obama concedes, Social Security is a “contributor” to the deficit — $37 billion last year. So how can his fellow Democrats claim that it isn’t? When we asked Sen. Schumer’s spokesman Brian Fallon, we got this on-the-record response:

Brian Fallon: This is nitpicking to the nth degree. Social Security is a standalone program and is fully solvent. Our deficit problem lies not with Social Security, but with the rest of the budget.

And from Sen. Durbin’s spokesman Max Gleischman, we got this:

Max Gleischman: We can argue line items and budget allocations all day — our position is that ss doesn’t add to the deficit. Jack Lew and the President agree.

But as we’ve seen, the president’s statement doesn’t back up what Durbin said, and Lew chose his words carefully in his USA Today article. We agree with Lew that Social Security does not “cause our deficits,” at least not by itself. But it already contributes some of the deficit, and that will grow over time unless changes are made somewhere.

When Lew says Social Security is “entirely self-financing,” he refers to the trust funds that have built up assets of more than $2.5 trillion over the years. That’s what the rest of the government has borrowed and spent on other things. Those trust funds and the future interest payments will keep benefits funded at promised levels for years to come, it’s true. But unless the government raises taxes or cuts other spending substantially, the government will need to borrow more from the public to finance its obligations to the trust funds.

In an opinion piece published Dec. 2 on Politico.com, David M. Walker — a former U.S. comptroller general who heads a nonprofit dedicated to reducing the deficit — flatly disagreed with “liberals” who deny Social Security’s contribution to the deficit:

Walker, Dec. 2: [C]ontrary to assertions by some liberals, Social Security is now adding to the federal deficit, since it currently pays out more than it takes in. This negative cash flow position will accelerate and become permanent by 2015.

That was before the CBO’s latest projections, which show the negative cash flow has become permanent ahead of schedule.

One of Washington’s leading experts on Social Security financing, Eugene Steuerle of the Urban Institute, says that Social Security unambiguously adds to the nation’s “fiscal woes” and that quibbling over how trust fund income and expenditures are accounted for is “somewhat silly.” In an exchange of e-mails with FactCheck.org, he said:

Eugene Steuerle: I think the right way to phrase the issue is whether an increasing portion of the population receiving benefits and decreasing portions paying taxes adds currently and in the coming years to our fiscal woes. There the answer is an unambiguous, “Yes.”

For more on the future effect of Social Security on the budget, see “Social Security and the Budget,” a report co-authored by Steuerle for the Urban Institute last May. A figure on page 4 graphically illustrates that Social Security’s expenses are projected to outrun its income. The gap is projected to grow to close to 2 percent of the national gross domestic product and remain there for decades, as far in the future as 2080 and beyond.